Bond yields and tech stocks echo ‘extreme anomalies’ of dot-com boom, says Morgan Stanley

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MarketWatch 08 July, 2021 - 01:05pm 12 views

What are Treasury yields?

Treasury yield is the return on investment, expressed as a percentage, on the U.S. government's debt obligations. ... The higher the yields on long-term U.S. Treasuries, the more confidence investors have in the economic outlook. But high long-term yields can also be a signal of rising inflation in the future. InvestopediaTreasury Yield Definition

The 10-year U.S. Treasury yield fell as low as 1.25% on Thursday, its lowest point since February, continuing a sharp reversal in the bond market amid growing concern about the pace of the global economic recovery.

The yield on the benchmark 10-year Treasury note was 2.8 basis points lower at 1.293% by 1:11 p.m. ET, climbing back slightly after reaching 1.25% earlier in the session. The yield on the 30-year Treasury bond dipped 2.4 basis points to 1.92%. Yields move inversely to prices and 1 basis point equals 0.01 percentage points.

"This decline in bond yields could be signaling that the inflation burst is transitory, and/or that the Delta variant will slow growth, although at 1.25% this morning that seems extreme," Ed Hyman, founder and chairman of Evercore ISI and head of economic research, said in a note Thursday.

Thursday's weekly jobless claims report indicated a slowdown in job growth. First-time applicants for unemployment benefits unexpectedly jumped to 373,000 in the week ending July 3. Economists were looking to see 350,000 initial claims, according to Dow Jones.

The increase in initial filings for unemployment insurance comes after June's jobs report on Friday showed the unemployment rate rose to 5.9%, higher than expected.

The spread of the more transmissible variant of Covid-19 also fueled worries about a deceleration in global economic growth, sending investors into the safety of U.S. Treasuries.

Japan declared a state of emergency for Tokyo that could reportedly lead to spectators being banned from the upcoming Olympic Games.

The yield decline in recent weeks represents a sharp reversal from a dramatic rise that started in late 2020. After entering January below 1%, the benchmark 10-year yield rose above 1.7% in March before retrenching near the 1.6% level for much of April.

The move has mystified investors and some believe it's largely technical factors driving the decline in yields.

"Over the past few months, many portfolio managers were expecting the 10-year Treasury yield to rise and held short positions in bonds. With the Federal Reserve reiterating its patient stance on tapering in Wednesday's minutes report, many portfolio managers changed course and covered their short positions in bonds, which drove up bond prices and pushed yields down," George Ball, chairman of Sanders Morris Harris, said in a note Thursday.

The Fed on Wednesday released the minutes from its latest meeting on June 15-16.

Some members indicated that the economic recovery was proceeding faster than expected and was being accompanied by an outsized rise in inflation, both making the case for taking the Fed's foot off the policy pedal.

However, the prevailing mindset was that there should be no rush and markets must be well prepared for any shifts. 

Short term rates have not fallen at the same pace as long-term rates, causing a so-called flattening of the Treasury yield curve. Investors expect the central bank's first move would be to slow its asset purchases while leaving its main rate at historic lows.

CNBC's Pippa Stevens and Jeff Cox contributed to this market report.

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Treasury Yields Could Be Signaling the Death of the 'Reflation Trade'

Barron's 08 July, 2021 - 03:43pm

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Stock investors are finally starting to notice the slide in Treasury yields this week, with trading Thursday reflecting a broad rush out of risky markets and into U.S. bonds.

Yields on Treasuries due between 5 and 30 years fell 5 basis points, or hundredths of a percentage point, with the 10-year yield trading below 1.3% for the first time since the start of this year. Stock indexes fell as well, with the S&P 500 down 0.8%, the Dow Jones Industrial Average off 0.6%, and the Nasdaq Composite down 0.8%. 

While stocks staged a sudden retreat from record levels hit Wednesday, the slide in bond yields wasn’t new. It was only an acceleration of a trend that started in mid-May; in fact, long-term yields topped out at the end of the first quarter, and since then have been drifting sideways—and more recently, lower. 

For more clarity about why, investors may want to look under the hood of the bond market at the components of the move. Traders have been betting on tighter Fed policy since last month’s meeting. And strategists at Barclays argued in a July 8 note that the minutes indicated “the committee wants to taper [its $120 billion in monthly bond purchases] sooner rather than later.” The bank expects an announcement in September.

The bond market’s inflation pricing doesn’t appear to contradict this view much. Since the meeting minutes released in mid-May, when the central bank first mentioned the outlook for reducing the pace of its bond purchases, Treasury markets have been pricing lower inflation over coming years. That could be the result of traders betting that withdrawal of accommodation will put a damper on inflation and growth. 

And after the June meeting, futures markets indicated a quicker pace of rate increases from the Fed, pulling the central bank’s first postpandemic rate increase into late 2022, Bloomberg data show. 

That move partly reversed itself this week, implying that broader concerns about growth may have sparked the most recent declines in yields (and stocks). The Covid-19 Delta variant and its potential effects on growth are “a clear focal point, as it is clearly much more contagious than other variants, though it is unclear whether it is as severe as some other variants,” wrote Peter Tchir, strategist with Academy Securities. 

Even so, credit markets didn’t do much to confirm the selloff in stocks. The two largest ETFs tracking the high-yield bond market, the iShares iBoxx $ High Yield Corporate Bond ETF (HYG) and the SPDR Bloomberg Barclays High Yield Bond ETF (JNK), were each down just 0.2%. And stocks had retreated from their morning lows by midday. 

So for investors, the long-term question may be not about virus variants, but the broader trend lower in Treasury yields and the questions that raises about Fed policy and global economic growth. Barclays says that “the Fed’s recent shift in tone is likely to raise credibility issues about the new [inflation] framework” adopted in 2019

TS Lombard strategist Dario Perkins attributes the longer-term slide in yields to concerns over “peak everything,” a phrase meant to reflect a slowdown in economic momentum compared to early this year, when activity and inflation rebounded sharply. 

Further, central bankers and policy makers worldwide have started to weigh how to reduce the monetary and fiscal stimulus, which was the largest since World War II, Perkins observes in his July 8 note. 

“Global policy tightening [is] taking over from inflation as the main ‘known unknown’ facing financial markets in the second half of 2021 and beyond,” he wrote. While he believes that Treasury yields are likely to rise from here—few on Wall Street expect the 10-year yield to remain below 1.3%—he added that “investors should expect greater volatility for global markets in the post-QE world.” 

If Thursday morning’s selloff was any indication, investors may be preparing for that world already.

Write to Alexandra Scaggs at alexandra.scaggs@barrons.com

Stock investors are finally starting to notice the slide in Treasury yields this week, with trading Thursday reflecting a broad rush out of risky markets and into U.

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Overpriced stock markets are headed for a major correction

South China Morning Post 08 July, 2021 - 03:43pm

Nicholas Spiro is a partner at Lauressa Advisory, a specialist London-based real estate and macroeconomic advisory firm. He is an expert on advanced and emerging economies and a regular commentator on financial and macro-political developments.

Analysis: Reflation rethink sends bond markets into a spin

Reuters 08 July, 2021 - 03:36pm

LONDON, July 8 (Reuters) - An economy powering back from the COVID-19 shock and resurgent inflation is yesterday's story if the sharp rally in the world's biggest bond markets in the last 24 hours is anything to go by.

Prices on U.S. 10-year Treasuries have shot up, pushing yields down 8 basis points on Tuesday in their second biggest daily drop of 2021. The rally accelerated on Wednesday, with yields falling to just below 1.3%, their lowest in over four months.

British gilt yields fell to a similar low while German Bund yields -- which looked set to push above 0% in May -- have dropped to -0.3% , .

Various explanations have been proffered: a squeeze on investors who had bet on yields rising, softer-than-expected economic data and concern about COVID variants.

Push past the noise and the real message from sovereign bond markets -- watched closely by policymakers and investors alike as a key indicator of economic trends -- is clear: economic growth, while firmer, looks to have peaked, and any pick-up in inflation will likely prove transitory.

"Markets have gone from thinking that growth is strong and inflation could be strong to saying growth has peaked and inflation is transient," said Guy Miller, chief market strategist at Zurich Insurance Group.

The turnaround in bond markets may not fit with the message from the U.S. Federal Reserve, which has just shifted to a hawkish bias and brought forward its trajectory for rate hikes.

But even with that shift, the Fed does not expect to start raising rates until 2023 and, like other major central banks, has stressed it will look past any short-term rise in price pressures.

Fed officials last month felt substantial further progress on the U.S. economic recovery "was generally seen as not having yet been met".

"You have to change your view given the facts that you are faced with - economic growth is not solid, inflation is not about to surge," said Pictet Wealth Management strategist Frederik Ducrozet.

The rush back into bonds comes as data reinforces the view that economic growth may have peaked.

Data on Tuesday showed U.S. service sector activity grew at a moderate pace in June, while a closely-watched gauge of German investor sentiment fell more than expected in July.

The bond rally would have inflicted losses on the multitude of traders with "short" Treasury positions - essentially a bet that yields would rise in line with a recovering economy - forcing many to liquidate those trades, pushing yields lower still.

Plenty of investors, including the world's biggest asset manager BlackRock, have been bearish on Treasuries. BlackRock reiterated its bearish bet on Wednesday. Yet yields have seen a steady 50 bps decline since March.

Explanations for that slide vary; some cite demand from Europe and Japan where central banks are resolutely dovish. Others point to the liquidity swirling around the U.S. financial system as the Treasury spends its cash balance and the Federal Reserve sucks up $120 billion of bonds each month.

But it may also be that despite the seemingly vibrant economic recovery, bond markets have had doubts on the outlook; yield declines are being led by "real" or inflation-adjusted borrowing costs, ING Bank analysts said in a note.

U.S. 10-year real yields have slumped to minus 1%, the lowest since February, while German real yields are at three-month lows.

It could be that the 1.77% U.S. 10-year nominal yield level touched in March will remain this year's high as more of the "reflation" bets are forced to unwind, according to Mike Sewell, a portfolio manager at T.Rowe Price.

"There is still some potential for that trade to reengage but that is more a 3rd or 4th quarter potential. Right now the reflation trade is not dead but it's certainly hibernating," Sewell said.

Two other factors may be contributing to the nervousness.

First, China, the world's number two economy, also this week released data showing services sector growth slowing to a 14-month low. That, some analysts believe, is a blueprint for how developed economies will fare.

Second, more countries -- including China -- are seeing a resurgence in COVID-19 caseloads and worries are growing about new, potentially more infectious variants.

The Delta variant, now dominant in many countries, including the United States, is more easily transmitted than earlier versions of the coronavirus.

"The muscle memory of markets is that governments will lock down again if they see cases rise, which means slower growth and that we are caught in a loop," said Charles Diebel, head of fixed income at Mediolanum International Funds.

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The number of Americans filing new claims for unemployment benefits rose slightly last week but continuing claims dropped, another indication that the labor market recovery from the COVID-19 pandemic continues to be choppy.

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Stocks Skid on Economic Worries

The Wall Street Journal 08 July, 2021 - 03:36pm

The S&P 500 lost 0.7% in recent trading, a sharp reversal from Wednesday when the broad stock-market gauge closed at a new all-time high. The Dow Jones Industrial Average slid roughly 275 points, or 0.8%. Meanwhile, the technology-heavy Nasdaq Composite, which also notched a new high Wednesday, fell 0.4%. All three indexes tumbled to start the day before paring some of their losses.

Thursday’s selloff across the U.S. market was broad-based, and came after investors pulled back from equities around the globe. All of the S&P 500’s 11 sectors traded lower in the early afternoon. Financial services companies, technology firms and homebuilders were among the hardest hit, with Twitter , PulteGroup and Morgan Stanley each losing 2% or more.

Stocks have powered to a series of record highs this year, but some investors have grown concerned that labor shortages and supply-chain bottlenecks may crimp the pace of economic recovery. The spread of the highly contagious Delta variant of the coronavirus globally is adding to worries.

Investors also are gearing up for a spell of potentially volatile summer trading, when trading desks tend to be lightly staffed.

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Why economists think bond yields are falling, slamming the S&P 500 and the Dow as the likes of Amazon benefit

MarketWatch 08 July, 2021 - 03:36pm

When bond prices are high — signaling strong demand — yields, the interest paid to a bond holder, fall. Strong demand signals a decline in economic-growth expectations among investors, who wish to lock in future gains by owning bonds. 

Our call of the day is from Doug Kass, president of Seabreeze Partners Management, who collected analysis from economists about why yields are falling.

“The 10-year-note price has defied consensus expectations,” Kass writes. “There has been no stronger consensus view [than] that, with domestic and global economic growth rebounding, U.S. interest rates were supposed to head higher.”

David Rosenberg, chief economist at Rosenberg Research & Associates Inc., argues that the focus should be on aggregate supply, not aggregate demand, because the world is “awash with inputs.” An oversupply of labor, commodities and capital on a global basis is inherently disinflationary, as is a savings glut, driving rates downward. This is exacerbated by globalization, innovation and such demographic trends as an aging population.

To economist Lacy Hunt of Hoisington Investment Management Company, it’s about math. “At the moment, each new issue of government bonds, notes, etc., has an ever-smaller incremental stimulus to GDP,” Kass says, describing Hunt’s view. Simplified: Hunt’s analysis from the Second World War onward shows that the effect of new government debt on economic growth has diminished, with each new dollar of debt leading to ever-lower percentage increases in annual growth. This curbs inflation, and causes yields to fall.

On the U.S. economic front, unemployment claims rose slightly as 373,000 Americans filed for unemployment last week, while continuing jobless claims for the week of June 26 came in at 3.34 million. Later, consumer credit figures for May are due.

Children in New Zealand are falling ill in high numbers, with some blame going to “immunity debt” from COVID-19. Amid lockdowns, social distancing and sanitizing protocols, kids have avoided a range of illnesses, causing their immune systems to suffer, doctors say.

Is COVID-19 also coming home? Socialization during the Euro 2020 soccer championship may be behind a surge in COVID-19 infections among English men, according to a study out of Imperial College London. Men had a 30% greater chance of testing positive for the virus than women from June 24 to July 5, researchers reported.

Fannie Mae’s monthly National Housing Survey notched record trend changes in June. Shown in our charts of the day, courtesy of Wolf Richter at the Wolf Street financial blog, a record 64% of people said it was a bad time to buy a home, while an all-time high of 77% said it was a good time to sell a home.

“If these sentiments become reality over time, it’s going to be a sea change for demand and supply at these crazy prices,” said Richter. “Each of these insightful and motivated sellers eager to cash out at these ridiculous prices must find a buyer of the opposite persuasion who thinks they’re getting a deal, which is what makes a market.”

Lucky dusting: Florida man discovers a months-old Powerball ticket worth $1 million while cleaning his home on the Fourth of July.

Animal spirits: The Oakland Zoo is inoculating its big cats, bears and ferrets against COVID-19 using an experimental vaccine — part of a national effort to protect animals.

The excess in financial markets will have to unwind in a drastic manner, warns one veteran economist.

Analysis-Reflation rethink sends bond markets into a spin By Reuters

Investing.com 08 July, 2021 - 03:35pm

LONDON (Reuters) - An economy powering back from the COVID-19 shock and resurgent inflation is yesterday's story if the sharp rally in the world's biggest bond markets in the last 24 hours is anything to go by.

Prices on U.S. 10-year Treasuries have shot up, pushing yields down 8 basis points on Tuesday in their second biggest daily drop of 2021. The rally accelerated on Wednesday, with yields falling to just below 1.3%, their lowest in over four months.

British gilt yields fell to a similar low while German Bund yields -- which looked set to push above 0% in May -- have dropped to -0.3%.

Various explanations have been proffered: a squeeze on investors who had bet on yields rising, softer-than-expected economic data and concern about COVID variants.

Push past the noise and the real message from sovereign bond markets -- watched closely by policymakers and investors alike as a key indicator of economic trends -- is clear: economic growth, while firmer, looks to have peaked, and any pick-up in inflation will likely prove transitory.

"Markets have gone from thinking that growth is strong and inflation could be strong to saying growth has peaked and inflation is transient," said Guy Miller, chief market strategist at Zurich Insurance Group (OTC:ZFSVF).

The turnaround in bond markets may not fit with the message from the U.S. Federal Reserve, which has just shifted to a hawkish bias and brought forward its trajectory for rate hikes.

But even with that shift, the Fed does not expect to start raising rates until 2023 and, like other major central banks, has stressed it will look past any short-term rise in price pressures.

Fed officials last month felt substantial further progress on the U.S. economic recovery "was generally seen as not having yet been met".

"You have to change your view given the facts that you are faced with - economic growth is not solid, inflation is not about to surge," said Pictet Wealth Management strategist Frederik Ducrozet.

Data on Tuesday showed U.S. service sector activity grew at a moderate pace in June, while a closely-watched gauge of German investor sentiment fell more than expected in July.

Plenty of investors, including the world's biggest asset manager BlackRock (NYSE:BLK), have been bearish on Treasuries. BlackRock reiterated its bearish bet on Wednesday. Yet yields have seen a steady 50 bps decline since March.

Explanations for that slide vary; some cite demand from Europe and Japan where central banks are resolutely dovish. Others point to the liquidity swirling around the U.S. financial system as the Treasury spends its cash balance and the Federal Reserve sucks up $120 billion of bonds each month.

But it may also be that despite the seemingly vibrant economic recovery, bond markets have had doubts on the outlook; yield declines are being led by "real" or inflation-adjusted borrowing costs, ING Bank analysts said in a note.

U.S. 10-year real yields have slumped to minus 1%, the lowest since February, while German real yields are at three-month lows.

It could be that the 1.77% U.S. 10-year nominal yield level touched in March will remain this year's high as more of the "reflation" bets are forced to unwind, according to Mike Sewell, a portfolio manager at T.Rowe Price.

"There is still some potential for that trade to reengage but that is more a 3rd or 4th quarter potential. Right now the reflation trade is not dead but it's certainly hibernating," Sewell said.

Two other factors may be contributing to the nervousness.

First, China, the world's number two economy, also this week released data showing services sector growth slowing to a 14-month low. That, some analysts believe, is a blueprint for how developed economies will fare.

Second, more countries -- including China -- are seeing a resurgence in COVID-19 caseloads and worries are growing about new, potentially more infectious variants.

The Delta variant, now dominant in many countries, including the United States, is more easily transmitted than earlier versions of the coronavirus.

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Global stocks fall, bonds, euro rise in flight to safety

Yahoo Finance 07 July, 2021 - 10:22pm

NEW YORK (Reuters) - U.S. stock prices fell while bond prices and the euro firmed on Thursday as investors trimmed risk and fled to safety amid a cloudier outlook for the pace of economic recovery.

Markets had come off of their more extreme early moves by mid-afternoon in U.S. trading, but remained lower.

Worries about knock-on effects of Beijing's crackdown on foreign-listed Chinese firms also weighed on equities.

Bonds, meanwhile, rallied strongly as investors factored in a lower-for-longer interest rate scenario, easing expectations that reflating economies would force rates to rise through the second half of the year.

"The reflation trade is shocked but not dead," said Jim Vogel, interest rate strategist at FHN Financial in Memphis, since rates will eventually have to rise.

"People have been persistently too optimistic because the first four months of year were just gang-busters good," he said.

Investor optimism about the pace of recovery is being tempered after months spent overlooking some bearish economic signals. Unusual items that boosted core U.S. inflation data last month, for example, may have made inflation and growth appear more robust than it was.

Around 1900 GMT, the Dow Jones Industrial Average was down 360.91 points, or 1.04%, to 34,320.88. The broad S&P 500 lost 41.57 points, or 0.95% to 4,316.56. The tech-focused Nasdaq Composite dropped 105.30 points, or 0.72%, to 14,559.76.

The yield on 10-year Treasury notes was down 3.5 basis points to 1.286%. It fell as low as 1.2496% earlier in the day.

Also raising concerns: political tensions in the Middle East, Russia and China that can distract the Biden administration from its domestic agenda, and lessen the focus on policies such as the infrastructure bill. Also, debate about raising the U.S. debt ceiling looms not far ahead.

Meanwhile, a reading on Thursday on the number of Americans filing new unemployment claims provided another indication that the job market recovery from the COVID-19 pandemic continues to be choppy.

The U.S. Federal Reserve on Wednesday dispelled fears of an imminent monetary policy tightening, but confirmed views that such talk could begin next month.

Shares in Europe fell about 1.8%.

The dollar index, which tracks the greenback versus a basket of six currencies, was down 0.22% at 92.436. The euro was last up 0.41%, at $1.1837.

Spot gold prices fell $4.375 or 0.24%, to $1,799.03 an ounce.

Brent crude was last up $0.82, or 1.12%, at $74.25 a barrel. U.S. crude was last up $0.87, or 1.2%, at $73.07 per barrel.

(Additional reporting by Simon Jessop, Tom Westbrook, Yoruk Bahceli and Brenna Hughes-Neghaiwi; editing by Kirsten Donovan, Angus MacSwan, Barbara Lewis, William Maclean and Sonya Hepinstall)

Wall Street's main indexes fell on Thursday as the spread of the COVID-19 Delta variant cast doubts over an economic recovery, while a rout in Chinese tech stocks appeared to have spilled across markets. Equities fell and bond prices rallied on worries about Beijing's crackdown on foreign-listed Chinese firms and a sustained global economic recovery. Stocks that led much of Wall Street's rally this year and those that stand to benefit the most from an economic rebound were under pressure, with cyclical players including financials and materials leading declines among the 11 major S&P 500 sectors.

(Reporting by Ambar Warrick and Devik Jain in Bengaluru; Editing by Arun Koyyur and Shounak Dasgupta)

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Stocks in Europe slumped in early action Thursday while bonds continued to rally, as investors assessed central bank developments and anticipated how the economy will behave next year without as much stimulus.

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